The prospect of tariffs (whether on imports to the EU or more generally) is the latest in a series of events this decade which require careful navigation to safeguard project delivery.

Construction contracts should be designed to manage events that impact cost and completion schedules. In this article we look at some of the key provisions in construction contracts to consider against the backdrop of tariff uncertainty. When negotiating a construction contract, parties typically seek to quantify and allocate the risk for events which may impact time and cost certainty. For parties who have already executed a construction contract, they should look to how any relevant mechanisms in the contract address the impacts of such events.

1. CHANGE IN LAW

If tariffs impacting construction contracts have been implemented by law (and the implementation is considered a change of law within the meaning of the change of law clause (if any) in the contract), there may be an entitlement to a price adjustment or, in some cases, more time or suspension of obligations. Whether a law will fall into the scope of the change in law clause depends entirely on the way in which the clause is drafted. Though these provisions are often negotiated, the starting point provided by some of the main standard forms is summarised below (though the standard forms are often heavily amended by the parties in practice).

FIDIC (Red): The Contract Price is adjusted to take into account the increase/decrease in Cost resulting from a number of changes, including change in Laws of the Country, which affects the Contractor in performance of its obligations under the Contract. Extension of Time is also provided where the Contractor suffers delay. (Clause 13.6)

JCT: New legislation in the UK affecting the execution of the works is a Relevant Event which may trigger an entitlement to an extension of time. (Clauses 2.27-2.29)

NEC4: A Change in Law of the country in which the Site is located is a Compensation Event. A Compensation Event provides an entitlement to extension of time and adjustment to Prices. If the effect is to reduce the total Defined Cost, Prices are reduced. (Optional Clause X2 and Clause 61)

Public Works Contracts: If there is a Change in Law, the Contract Sum is adjusted by the increase/decrease in the cost of performing obligations as a result of certain changes, which include customs or excise duties. ‘Law’ is defined to include certain domestic and EU law. (Clause 15.2)

RIAI: The Contract Sum is adjusted where cost of the performance of the Contract is increased/decreased as the result of any legislative enactment, rule or order or the exercise by the Government of powers vested in it or by way of certain events which include imposition of new duties / tariffs or alteration of existing duties / tariffs. (Clause 4)

2. PRICE ADJUSTMENT

Several standard form construction contracts provide for price adjustments which typically speak to other provisions (including Change in Law) to avoid double recovery. Some of the main standard form provisions are summarised below.

FIDIC (Red): Amounts payable to the Contractor are adjusted in the event of rises in the costs of labour, goods or other inputs to the works, in accordance with a table of cost indexation set out in a schedule. However, this schedule of indexation must be pre-agreed by the parties. (Clause 13.7)

JCT (Standard Building Contract): It is possible for the Contract Sum to be adjusted in response to the operation of various mechanisms in the Contract. These include an option for the parties to agree ‘Fluctuations Provisions’ to take into account various cost changes. (Clauses 4.2-4.3)

NEC4: There are various options: (i) a cost reimbursable form of contract, whereby the Contractor is paid based on the actual costs incurred in carrying out work, along with a pre-agreed lump sum / percentage to cover overheads and profit (Option E); and (ii) a price adjustment for inflation clause for use with Main Options A to D. As with FIDIC, this clause requires parties to pre-agree relevant indices. (Option X1)

Public Works Contracts: A price variation mechanism provides for fluctuations in prices for materials and fuels, by reference to increases in the prices of categories of goods in the CSO’s Wholesale Price Indices. The mechanism is triggered by price changes for increases above a threshold set by the contracting authority (of between 3% and 10%). (Clause 15)

RIAI: Any additional price for materials, goods, plant and equipment, as compared to pre-agreed scheduled prices, are added to the Contract Sum. The prices to be paid must be submitted to the party administering the contract. (Clause 36)

3. FORCE MAJEURE

Force majeure clauses typically provide a mechanism to deal with events whose probability of arising or impact could not have been contemplated or priced at the time the contract was agreed, and which neither party will have caused or been able to control, but which will impede one or more of the parties in carrying out their obligations.

Imposition of tariffs may not entirely impede a party from complying with its obligations, but it is always worth reviewing how the clause in the contract has been drafted. Whether the imposition of tariffs or their impact falls within the definition of ‘force majeure’ (or other terms which may be used, such as ‘Exceptional Events’ in the FIDIC standard forms or ‘Relevant Events’ in the JCT standard forms) will depend entirely on how the contract has been drafted.

If an event is a force majeure event, there may then be an entitlement to suspension of certain obligations, extension of time for completion, protection from liability for breach of contract, or a combination of these reliefs, or termination of the contract without either party being liable for damages. Again, it will depend on what is considered a force majeure event and what exactly the contract says regarding relief entitlement or otherwise.

4. OBLIGATIONS TO MITIGATE LOSS

Whatever the mechanism, a construction contract may include an express provision (or there may be a general provision elsewhere in the contract) which makes any entitlement to relief dependent on a party’s efforts to mitigate loss by, for example, checking if there are alternative ways to perform obligations or using reasonable or best endeavours to minimise delay, price increase, or other impacts. The JCT standard forms, for example, include such an express duty of mitigation.

5. OBLIGATIONS TO NOTIFY AND KEEP RECORDS

Of utmost importance is to identify any obligations that apply once a relief event is triggered. For example, a clause may specify a party’s obligations once a certain event occurs (such as obligations to give notice, keep records, and use reasonable or best endeavours to mitigate loss). Failure, for example, to comply with ‘early warning’ or ‘delay’ notice, could negate or reduce the entitlement to relief.

6. THIRD PARTIES

Construction contracts should also be carefully reviewed to identify any obligations that arise towards third parties (such as lenders or purchasers or tenants). For example, requiring that they are notified of any extensions of time or price adjustment which could impact their own arrangements or obligations.

Tariffs impacting the construction industry will again highlight the importance of cooperation and collaboration between parties to construction projects. Some contracts may even include a requirement that in the event of a change in law or force majeure, the parties negotiate and amend the contract to preserve the commercial intent of their original agreement. Whatever the approach to progressing the project, parties should always be aware of the terms of their construction contract, which legally bind them. Making full use of the mechanisms in a well-negotiated contract can prove to be a helpful and effective project management tool.

Enya Levy, Associate. www.arthurcox.com

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